(snip)"What the Riskloves haven’t quite looked at or even remotely addressed are late 2004 and 2005 vintage loans with a toxic demeanor. As mentioned the 2006 subprime market is large, and conditions in that vintage are worsening quickly. The next chart shows the amounts involved in the last three years with this genre. Subprime made up 25% of the total mortgage market in 2005 and 2006, and about 20% in 2004. Indeed 93% of all subprimes in 2005 were purchase originations (see second chart). That’s $665 billion worth, pretty much the whole blue block in the chart, and ditto for 2006. Poo poo it if you must, but there were about $1.9 trillion subprimes originated in 2004-2006. Add in a trillion in second mortgage HELOCs and lord knows how many midprime and/or Alt A pay options, and you have ground zero for a credit bust of biblical proportions."
(snip)"And that’s why the discussion swirls in my posts and in the comments section about the enablers of these mortgages dropping like flies lately. Incidentially two more subprimers closed shop yesterday [Popular Financial Holdings and Origen Wholesale lending - sic], and there are some rumors about #5 Fremont being next. And the subprimers are definitely tightening up on credit standards. Broker Outpost is an active industry chat site that has tipped off the Bubble watch community on blow ups and credit condition tightenings well ahead of the mainstream media. Witness (in real time) various posters discuss how Fremont is now out of the subprime 80/20 game. 80/20s are piggybacks: a primary mortgage, leveraged with a home equity credit line (HELOC). HELOCs of course are subordinate credits, and are the most vulnerable of all. They have been used aggressively by weak credits buying at the peak in the now weak Bubble markets (see next chart) . There are a trillion bucks of these out there, and an astonishing 40% of US mortgages have them. They constitute 10.5% of total mortgage debt."
(snip)"What are some key aspects about the 2005 subprimes? First 50% of them are no or low doc mortgages. Secondly and this is crucial, 70% of them are two year ARMs and thus will reset in 2007. That’s $465 billion worth. Also keep in mind that about 17% ($55 billion) of the 2004 vintage used 3 year exploding ARMs, and those initial teaser rates were very low. So we are looking at about $520 billion in 2004 and 2005 subprime vintage resets in 2007.
Subprime mortgages are set to an index such as the Libor rate (now about 5 3/8%) plus a margin (about 4-5% typically, but sometimes higher). So a typical subprime homeowner is looking at about 10% as the new reset rate on his or her “exploding ARM”. The rate then usually adjusts every six months going forward. The initial first two year rate is often a steeply discounted or “teaser” rate. These run the gamut, but when I’ve looked at portfolio holdings of various toxic lenders, 5-7% turns up a lot. I would estimate that exploding ARMs will now deliver at least 50% higher payments to borrowers."(snip)
In a nutshell, you've got three TRILLION dollars worth of ARM's and HELOC loans due to reset interest rates this year ... with average monthly payments due to increase by 50% (or even more, if the mortgage included a 'teaser' rate or negative amortization). At the same time you've got subprime mortgage lenders already starting to drop like flies, based on the ARM's and HELOC loans that have already gone belly-up. Thus the subprime mortgage lenders are being forced to 'buy back' loans they have already sold to mortgage bond repackagers / investors, but now the subprimes don't actually have the money necessary to buy back the belly-up loans they originated. You've also got subprime mortgage credit starting to dry up as investors pull their money out of the market sector, with the subprime mortgage lenders being forced to tighten creditworthiness standards re future borrowers on the basis that the subprime mortgage lenders themselves may now be forced to hold the mortgages they are writing (as well as absorb the default risk associated with those mortgages).
All of this leads to the conclusion that during 2007 you've got all sorts of homeowners who are going to be subject to 'shock and awe' when their monthly mortgage payments jump dramatically - who will try to refinance - but who will find that no subprime lenders that are actually still in business are going to approve such a refi given the homeowner's actual equity (or lack thereof), their actual income (or lack thereof), the actual current resale value of their home, and their actual credit rating.
This tidbit from further down the link page really says it all - keep in mind that 24 months is the magic age of many ARM's where interest rates first reset ...
(snip)"From 13 to 21 months the vintage happily ran at 4-6% 60+ day delinquencies. Around 24 months (reset) all hell broke loose. 1st column is months of seasoning, 2nd is 60+day delinquencies:
22 6.23%
23 7.18%
24 8.10%
25 10.01%
26 11.92%
27 14.36%
The #’s speak for themselves."(snip)
And to provide additional perspective, it is thought that some 30% of the total dollar value of outstanding mortgage debt is now 'subprime' - which when combined with a 14% delinquency rate translates into the strong probability that 4-5% of all mortgaged homes will wind up as a distressed sale / on the auction block at some point - with most of the former owners being forced to file for bankruptcy - with property resale values becoming even more depressed - and with refis becoming virtually impossible.
And lastly, analysts are starting to figure out that the 'median' home price figures being published for various regions are being heavily skewed by steadily rising market prices for multi-million dollar luxury homes which are still in heavy demand (the rich get richer). Thus the sale of a comparative handful of these luxury homes at stratospheric prices is enough to cause regional 'median' home price statistics to understate the drop in market prices which is actually occurring re 'average' homes. see . However, refi attempts will be based on specific market price appraisals of individual homes, which will hurt Joe Average much more than Richie Rich.
~



Reply With Quote

Bookmarks